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Thursday, August 20, 2009

Market Thought... F- me :)

Yesterday Buffett's warning to congress was published concerning the threat of the Banana-Republic. (article) We were always stuck in a deflation due to the decline of housing, but now that housing has stabilized I was waiting for a signal to when inflation was about to kick in. Well, this is the biggest signal an investor could ever hope to have. Buffett has access to a broad range of industries and sectors, so if he says things have gotten better, they have... which mean the recession is pretty much over, and his warnings are very real.

He also points out the proper equation for this market. A collapsed dollar (from inflation) will mean a higher stock market. Since the market is no longer overbought, and with this inflation threat now getting started, market shorts should be taken off the table. (Or a best very short-term trades)

The one thing, IMO, that may counter the above, is a rule that will become effective in Jan 2010 that will bring approx. 1 trillion of off-balance sheet 'bad' assets onto the balance sheet of the banks. (article) This obviously will be a hit to the banks, and allow for more losses. But the system is stronger now, and they will be able to absorb the hit, although, IMO it will hinder their earnings growth for a while. (But I do not know if the markets will pay attention to this pretty important fact, especially if the market keeps rising... something to keep an eye on.)

As for the market, it is at a very high PE, yet does not seem to want to consolidate enough. It bounced off the 320SMA.

With the inflation threat now in play, we are dealing with an economic equation, not market fundamentals. So I do not know if a high PE matters at this juncture.

With this thesis, the most interesting plays at the moment are Fs... F, FCX and FXI. Technically, they look interesting.

Obviously with the inflation trade commodities are the place to be, so GLD, PBR and others are the place to be w/this thesis.


  1. Inflation??? With people walking away from their houses because they're upside down? With the savings rate going up and a drop in retail sales? With a credit card fiasco on the horizon? With commercial property values collapsing? A few months of housing price plateauing, with a slight uptick in a few areas, is hardly evidence of inflation--a dead cat bounce, maybe.

    You need both an increase in money supply AND credit for the inflationary multiplier to kick in. Credit is being destroyed much faster than the fed can pump in money (which just sits in excess reserves because the banks aren't lending).

    Something like 97% think the dollar will get trashed. Doesn't that awaken your contrarian instincts? Please consider this:

  2. Thanks for the link... i disagree with the guy, but I see where he is getting at... the recent market post 'Market Thought... economic equation' was inspired by your comment.